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‘D’-Word is Not So Scary Now

Posted on: July 24th, 2011

Who is afraid of a sovereign default?

“Not I,” said the Greek. On Thursday, the dreaded D word was an ingredient in the potion to raise Greece from the grave.
“Not I,” said the German, whose chancellor Angela Merkel decreed that some of the private holders of Greek debt would be victims of default.

“Not I,” said the Frenchman whose President Nicolas Sarkozy cooked up the default deal with Angela Merkel.

“Not I,” said the Yank, whose US government is threatening to default on its payments if a deal is not reached on its debt ceiling by August 2.

On Thursday afternoon, the Yahoo Finance webpage was carrying the headline ‘US Braces for Default’. Seemingly paradoxically, right alongside the gloomy headline, the Dow Jones Index was in rapid recovery, up 158 points. Nor had news from Europe that a second Greek bailout included default spooked investors. It prompted a buying frenzy.

Thursday’s emergency European summit was flagged as D-Day for the euro. Over in the eurozone, as the news of the default deal leaked out, the currency had a bumper day, rising by 1.65¢ against the dollar. European stock markets gained ground, the FTSE bounced by 0.8 per cent, the German Dax by one per cent and in the US, the Dow closed 152 points higher. Even the ISEQ finished the day of default ahead by 0.62 per cent. The markets warmed to the so-called disaster.

All eyes were on the ratings agencies. It was obvious that they would pronounce that the Brussels deal included default, however fancifully the “burden sharing” was dressed up as “voluntary”.

The “voluntary” plea is obvious nonsense; no private sector investor will exchange a current bond for one with less favourable terms, unless his arm is twisted. Lots of arms have been twisted.

No one except the ECB seemed to be too troubled that an organised default would soon be triggered. The ratings agencies could go take a hike. A relief rally set in. Buyers bought Italian and Spanish bonds. Yields on Irish and Portuguese bonds dipped.

A Rubicon had been crossed. Denial in the case of Greece was over. For months the markets have been signalling that Greece would be forced into debt write-offs. Political heavyweights and the mighty Jean-Claude Trichet had stood, faces to the sun, rubbishing the markets’ verdict. On Thursday, we witnessed the climbdown. It was couched in soft “restructuring” rhetoric, but the catastrophe facing Greece and Europe had forced the mighty to gobble their words.

A face saver was concocted for ECB president Trichet who had threatened to refuse Greek bonds as collateral in the event of a default. Member governments hurriedly agreed to guarantee Greek paper as collateral for Jean-Claude. Problem solved.

The markets loved it. They were once again on the button. Europe had wasted summit after summit with sticking- plaster solutions. The ostriches had bowed to the inevitable. The markets had won.

Back in Ireland, the ostriches are still in prime position.

On Thursday morning the secretary of the Department of Finance, Kevin Cardiff, told the Dail’s Public Accounts Committee that default was not high on his agenda. He was focusing on the here and now, the negotiations in Europe. Ostrich Kevin bristled whenever the default word was uttered. He ducked all questions about whether the mandarins had prepared Plan B for the default option.

Ostrich Enda was out in Brussels enjoying a rare day of good news. Greece’s default package bestowed similar benefits on the other European basket cases — Ireland and Portugal. Ostrich Enda shared the sun shining on Greece. Ireland would see its interest rate cut by around two per cent.

We would enjoy the privilege of buying bonds in the secondary market with the new powers given to the rescue fund. Ireland was one of those whose loans could be extended from seven-and-a-half to 15 years.

So Ireland will now pay less interest on longer loans. Relief had arrived at last. The Taoiseach was on a roll. Only that morning the Irish Times/ Ipsos opinion poll had recorded the Taoiseach’s popularity at unprecedented heights. Now he was about to scoop the pool and claim a triumph at the top tables of Europe. Enda the parliamentarian was suddenly Enda the statesman.

Enda Kenny deserves a break after so long in the doldrums. He is proving far more effective as a Taoiseach than most observers predicted. He is not out of his depth. He is a genius at presenting a cheery front in times of adversity. His optimism is infectious and has camouflaged some of the austerity facing the nation, but his presentation of the deal as a success for Irish diplomacy is over the top. Ireland has cashed in on the coat-tails of Greece. The Greeks had borne us gifts. If Greece, the worst offender, is forgiven, lesser sinners must receive proportionate comfort. Portugal and Ireland only had to sit back and benefit from the concessions included in the Greek rescue plan.

Enda’s immediate problem will be to dampen expectations. Too loud a cry of triumph will lead to demands for a relaxation in his austerity programme. Vested interests will be striving for an end to the cuts. How can he claim that it has been a good day for Ireland and still leave special needs pupils neglected? If he has really saved €800m a year with the interest rate cut, what is he going to do with the extra cash?

He was quick to pooh-pooh the idea of looming largesse after trade union leader Jack O’Connor was first to jump in with demands for the loot.

The euphoria will die down this week when Ireland’s citizens realise that the boot will not be taken off their throat by the next Budget; that the IMF gang will be resuming its quarterly visits to ensure that we are still paying back the European bankers who helped our home grown rogues to bring the economy to its knees; that crippling repayments still need to be paid; and that Michael Noonan will be taking €3.6bn out of our pockets next year. Here comes the reality check.

The debt remains enormous. An €800m saving is a pittance in comparison with the overall burden. Bond prices are temporarily a bit better, but are still signalling that we will not be allowed back in the markets to borrow next year.

European leaders were at pains to insist that the deal was unique to Greece. They were terrified that it would be seen as a model for Portugal and Ireland.

Let us help them to realise their worst fears. We should take the deal as a template. After the dust has settled we should look for similar generosity.

Default should no longer be the taboo that politicians have painted it. In the case of Greece, the markets have recognised it as a realistic part of the solution. The roof did not fall in when it was inserted as an essential ingredient. Shares rocketed in response.

The US is openly toying with default. Europe has accepted it as a tool in rescuing the currency.